The Effects of Climate Change on the Natural Rate of Interest: A Critical Survey

32 Pages Posted: 1 Nov 2022

See all articles by Francesco Paolo Mongelli

Francesco Paolo Mongelli

European Central Bank (ECB); Goethe University Frankfurt

Wolfgang Pointner

Oesterreichische Nationalbank (OeNB)

Jan Willem van den End

De Nederlandsche Bank

Date Written: October 1, 2022

Abstract

This survey reviews the literature about the impact of climate change on the natural rate of interest (r*), an important yardstick for monetary policy. Economic and financial developments can lower r* in scenarios with increasing climate-related damages and uncertainty that reduce productivity growth and raise precautionary savings. Instead, in scenarios that assume innovations and investments induced by transition policies, r* could be affected positively. Orderly climate policies have a pivotal role by facilitating the transition to a carbon-neutral economy and supporting a steady investment flow. We discuss the main models used to simulate the effects of climate change on r* and summarize the outcomes. The downward effects of climate change on r* can be substantial, even taking into account the high degree of uncertainty about the outcomes. Moreover, the downward pressure on r* will further challenge monetary policy in the long run, by limiting its policy space.

Keywords: climate change, interest rate, monetary policy, natural rate of interest, social cost of carbon

JEL Classification: E52, Q54

Suggested Citation

Mongelli, Francesco Paolo and Pointner, Wolfgang and van den End, Jan Willem, The Effects of Climate Change on the Natural Rate of Interest: A Critical Survey (October 1, 2022). ECB Working Paper No. 2022/2744, Available at SSRN: https://ssrn.com/abstract=4263234 or http://dx.doi.org/10.2139/ssrn.4263234

Francesco Paolo Mongelli (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Wolfgang Pointner

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Jan Willem van den End

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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